market volatility comments August 8, 2011

These are times that test us all as investors. Quick and steep declines are painful to watch – and always seem to be created by events that are so different from anything in the past that they deceive us into believing they will create a permanent, unrecoverable condition. Even though history repeatedly proves this to be untrue, it often seems emotionally unsatisfactory to provide statistics to make us feel better. So I’d like to include a few quotes that when thought about deeply are profoundly true, and which great investors do apply.

In his 1987 annual report for Berkshire Hathaway, Warren Buffett said (my emphasis in bold);

“…In my opinion investment success will not be produced by arcane formulas, computer programs, or signals flashed by the price behavior of stocks and markets. Rather, an investor will succeed by coupling good business judgment with an ability to insulate his thoughts and behavior from the super contagious emotions that swirl about the marketplace.”

I believe ‘good business judgment’ is owning high quality franchises that pay us high and rising cash dividends and only selling our stake when the market is so excited about them that it offers us a truly enticing premium to sell. If we treat our stakes in great businesses as an owner, we wouldn’t want to sell if we weren’t offered a fair price… The market is definitely not offering us a fair price at this time. So good business judgment likely means holding and in some cases adding to these positions…

Benjamin Disraeli, a former British prime minister once said; “Patience is a necessary ingredient of genius.” As hard as this is to practice sometimes, if we have a good, time tested plan as an investor, this patience is vitally important.

An analyst we often read, Don Hays, wrote this excerpt in his blog today and we wanted to refer to it as it encapsulates well some key thoughts.

“So today, should we run from cover like those fast traders? No!! In fact, it is a truism that severe corrections don’t stop until the pure technicians turn bearish. Furthermore, as Ed Yardeni points out, there is now $8.3 trillion in money market and savings accounts. We’ve often said that bear markets don’t start until the monetary liquidity dries up, and today the monetary liquidity is exactly the opposite. You can bet on it, the Fed is going to do all in its power to entice investors (and corporations and banks) to put their low-yielding money to work.

So…the bottom line is that this is “hard hat” time, a time when investors have to temporarily hunker down and resist the panic of the herd. It is a personality trait that all good investors learn over the years, but it never gets easier it seems. Every time there is a new threat trying to knock over those valuable disciplines of the past, but history tells us to stay the course, and continue to rely on the instrument panel. These storms do die down, and your patience and fortitude will be rewarded.”

He’s correct, it is ‘hard hat’ time, but the positive news is that we do have good ‘hard hats’, as in very high quality, dividend paying companies. I want to leave you with a few statistics on that. Here is a sampling of the kinds of companies we own and how long they have been sharing their profits with investors through durable and growing dividends:

Johnson & Johnson, 1944

International Business Machines, 1916

Conoco Phillips, 1934

General Electric, 1899

Norfolk Southern, 1901

Kimberly Clark, 1935

Exelon Corp, 1908

I believe that these companies, and others owned in our strategies, will not only survive these times, but prosper in the future like they have throughout generations – often with events that appeared even more dire than what we now face.